Alternative Minimum Tax Hits Downsized Workers Receiving Severance Packages

With the US Dept. of Labor reporting an unemployment rate of 6.7% in November 2008, the highest in 15 years, it doesn't take a rocket scientist to figure out that many Americans lost their jobs.

Not only will many of these individuals be out of a job, they will find that even though these packages were heavily taxed at distribution, they will still have a shortfall when preparing their returns for the 2008 tax year.

Most taxpayers have consistent income and tax liabilities, usually with minimal increases in income from merit pay increases year after year. However, in 2008 and 2009 as the recession continues to increase the ranks of the unemployed, middle class workers hit by downsizing who received lump sum severance payouts will likely be pushed into the AMT calculation of income and taxes.

The hardest it will be households in states with high income and real estate taxes who itemize deductions. The AMT removes these and some other deductions from the itemized deduction calculations on Federal form Schedule A.

Initially, the AMT was enacted to ensure that some of the richest Americans who have the ability to use various tax shelters and deductions, pay their fair share of taxes. Since then, the AMT has come under ever increasing scrutiny as more and more middle class taxpayers become liable for AMT.

According to a 2006 Washington Post article, the tax is expected to expand to more than 30 million taxpayers in 2010 from 3.8 million mostly well-off households in 2006.

So, how does AMT compute income and taxes differently?

As noted in the Wikipedia description of the AMT - In addition to the normal tax code calculations, the AMT system uses a different set of rules for determining taxable income and allowable deductions. The "tax preference items" are added back, then an AMT Exemption is subtracted to compute AMT Taxable Income (AMTI). The AMT Exemption is phased out at 25 cents per dollar of AMTI above $150,000 on joint returns.